by Robert L. McMahon
To the uninitiated civilians out there who don’t know what to make of my “Corporate Governance” scribblings and why I believe corporate governance to be vitally important in understanding “how we got here” in this financial crisis, I’m going to offer two (2) important quotes. The first is by noted corporate governance author and pioneer, Robert A. G. Monks and is the title of a monograph he co-authored with Allen Sykes from November 2002, “Capitalism without owners will fail”, and the other is by noted governance expert, author, and Senior Fellow at The Millstein Center of The Yale School of Management, Stephen Davis, who wrote this week, “Owners that fail to exercise stewardship responsibilities must be understood as a systemic risk….” Both men’s quotes can be addressed at our investment and pension management industries. Why? For their repeated failures to act as owners of the companies they invest our hard earned dollars in – at both the investment management company and issuer levels. Misters Monks and Davis are precisely correct to admonish our investment managers for their delinquent attitudes of ownership, but it’s also our house of mirrors regulatory framework that has helped to create the current state of affairs.
The regulatory framework within which we invest our money seems to have been crafted by the “gang that couldn’t shoot straight”, or so it would seem to me, because the framework itself seems to stand in the way and obfuscates the roles and responsibilities of ownership and fiduciary accountability. The first area I will focus on is ownership rights where laws are established to actually inhibit shareholders from exercising those very rights. Within days of Mr. Davis writing the above words we were treated to having Carl Icahn pen an Op-Ed for the New York Times titled, “We’re Not the Boss of A.I.G.”. Mr. Icahn quickly get’s to his point with the words, “…under American corporate law share ownership does not count for much.” And Mr. Icahn is writing, believe it or not, about how little power the US government has over A.I.G. even though it is a “majority” shareholder – the biggest by far (40% interest I believe). To Mr. Icahn governance reforms need to address “proxy access” which has been deliberately crafted by corporate law to be an extraordinarily expensive process for shareholders to gain access to. He concludes his piece as follows, “The ownership rights that the government, as a shareholder, is now talking about are the same ones that activist shareholders have been demanding for years”; notice how the calls for greater exercise of ownership rights, can be directly mitigated by laws that are enacted to protect and shield management and the boards; the boards who are supposed to represent the shareholders.
The second area of this regulatory framework that has been setup to obfuscate is fiduciary accountability. Previously we saw the layer of corporate babble that inhibits the exercise of fiduciary ownership, and then we get to the layers where the Department of Labor and ERISA (Act of 1974) diffuse fiduciary accountability of pension and investment management by deliberately omitting language that enforces, as Stephen Davis writes, “…oversight powers to ensure that retirement fund behavior was aligned with long-term member interests.” Essentially this means that the pension plan manager is acting as a fiduciary only insofar as selecting the investment company to receive the plan assets, in seeing that fees are kept to a minimum, that the plan is diversified, and that it is following all the codes established by ERISA. But here there is no fiduciary accountability standard established to oversee the quality of the investment selection(s) that the fund manager would be doing; that is, the pension plan sponsor is exempted by practice, rule, and law from ensuring pension assets are invested for the “long-term member interests”. That pension plan could be investing in Bernard L. Madoff for all they know, but as long as Bernie passed the smell test, shows he’s diversified, and has his paperwork in order, well, you get the picture.
Finally we get to number three on the list where the regulatory framework fails to impose any fiduciary accountability standard on the investment manager itself to consider the “long-term member interests” of the members invested dollars. This goes to the heart of the matter when money is being plowed into the next Enron, publicly traded insurance company with an uncollateralized CDS portfolio, or brokerage firm turned mortgage bank. If there were requirements for investment managers to screen for what has been heretofore called “unforeseeable” pretty soon it will become “foreseeable” when it’s required. If building, engineering and construction codes were setup like this we would have codes laid out in terms of simple measurements with no requirements as to the “quality” of the materials used. We would have engineering and construction firms escaping liability because there was no “quality” metrics, no “build to code” guidelines imposed upon them.
Today we have an opportunity to correct this dysfunctional regulatory framework that prevents shareholders from acting like owners and disqualifies investment managers from any fiduciary standard of accountability. With this opportunity we can begin the process of rebuilding trust into our investment management and financial market systems. But this can only be accomplished if the parties involved can accept responsibility for their previous failures and work toward correcting the mistakes. What we don’t need is finger-pointing, bluster, and bloviation for the cameras; and especially when questions are asked by citizens of their congressional leadership and what is returned is arrogance, posturing and denigration; especially when that congressional leadership can be quoted as saying, with regard to the situation that Fannie Mae and Freddie Mac helped to exacerbate, “I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing.”
Personally I don’t want anyone with any sense of responsibility (even if they were just “the ranking minority member”) for oversight EVER to say that they are going to “role the dice” with other peoples money congressman. It makes me think that you treat tax-payer money as if it’s nothing more than casino chips and serves as a great example of why most Americans hold your collective body in such contempt.
The regulatory framework within which we invest our money seems to have been crafted by the “gang that couldn’t shoot straight”, or so it would seem to me, because the framework itself seems to stand in the way and obfuscates the roles and responsibilities of ownership and fiduciary accountability. The first area I will focus on is ownership rights where laws are established to actually inhibit shareholders from exercising those very rights. Within days of Mr. Davis writing the above words we were treated to having Carl Icahn pen an Op-Ed for the New York Times titled, “We’re Not the Boss of A.I.G.”. Mr. Icahn quickly get’s to his point with the words, “…under American corporate law share ownership does not count for much.” And Mr. Icahn is writing, believe it or not, about how little power the US government has over A.I.G. even though it is a “majority” shareholder – the biggest by far (40% interest I believe). To Mr. Icahn governance reforms need to address “proxy access” which has been deliberately crafted by corporate law to be an extraordinarily expensive process for shareholders to gain access to. He concludes his piece as follows, “The ownership rights that the government, as a shareholder, is now talking about are the same ones that activist shareholders have been demanding for years”; notice how the calls for greater exercise of ownership rights, can be directly mitigated by laws that are enacted to protect and shield management and the boards; the boards who are supposed to represent the shareholders.
The second area of this regulatory framework that has been setup to obfuscate is fiduciary accountability. Previously we saw the layer of corporate babble that inhibits the exercise of fiduciary ownership, and then we get to the layers where the Department of Labor and ERISA (Act of 1974) diffuse fiduciary accountability of pension and investment management by deliberately omitting language that enforces, as Stephen Davis writes, “…oversight powers to ensure that retirement fund behavior was aligned with long-term member interests.” Essentially this means that the pension plan manager is acting as a fiduciary only insofar as selecting the investment company to receive the plan assets, in seeing that fees are kept to a minimum, that the plan is diversified, and that it is following all the codes established by ERISA. But here there is no fiduciary accountability standard established to oversee the quality of the investment selection(s) that the fund manager would be doing; that is, the pension plan sponsor is exempted by practice, rule, and law from ensuring pension assets are invested for the “long-term member interests”. That pension plan could be investing in Bernard L. Madoff for all they know, but as long as Bernie passed the smell test, shows he’s diversified, and has his paperwork in order, well, you get the picture.
Finally we get to number three on the list where the regulatory framework fails to impose any fiduciary accountability standard on the investment manager itself to consider the “long-term member interests” of the members invested dollars. This goes to the heart of the matter when money is being plowed into the next Enron, publicly traded insurance company with an uncollateralized CDS portfolio, or brokerage firm turned mortgage bank. If there were requirements for investment managers to screen for what has been heretofore called “unforeseeable” pretty soon it will become “foreseeable” when it’s required. If building, engineering and construction codes were setup like this we would have codes laid out in terms of simple measurements with no requirements as to the “quality” of the materials used. We would have engineering and construction firms escaping liability because there was no “quality” metrics, no “build to code” guidelines imposed upon them.
Today we have an opportunity to correct this dysfunctional regulatory framework that prevents shareholders from acting like owners and disqualifies investment managers from any fiduciary standard of accountability. With this opportunity we can begin the process of rebuilding trust into our investment management and financial market systems. But this can only be accomplished if the parties involved can accept responsibility for their previous failures and work toward correcting the mistakes. What we don’t need is finger-pointing, bluster, and bloviation for the cameras; and especially when questions are asked by citizens of their congressional leadership and what is returned is arrogance, posturing and denigration; especially when that congressional leadership can be quoted as saying, with regard to the situation that Fannie Mae and Freddie Mac helped to exacerbate, “I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing.”
Personally I don’t want anyone with any sense of responsibility (even if they were just “the ranking minority member”) for oversight EVER to say that they are going to “role the dice” with other peoples money congressman. It makes me think that you treat tax-payer money as if it’s nothing more than casino chips and serves as a great example of why most Americans hold your collective body in such contempt.
No comments:
Post a Comment